Christophe Heyndrickx: From Russia with love

Russia needs to use gas more efficiently and more sustainably, as reserves are not endless

Christophe Heyndrickx is bio engineer in environmental and agricultural economics at research consultancy Transport and Mobility, in Leuven, Belgium. He specialises in modelling regional and national economic policy. In particular, he was one of the project partners in the EU funded project SUST-RUS, which developed spatial-economic-ecological model for the assessment of sustainability policies of Russian Federation. By the end of the project in 2011, it had been created a model to calculate Russia’s sustainability in terms of social, economic and environmental outlook, in the short term—1 to 2 years—and long term—5 to 6 years. Heyndrickx tells InnovationSeeds about the Russian energy context and whether reality has mirrored its model’s predictions.

What was the overall goal of the project? We wanted to create a model that is open source, to be used by Russian and European researchers. The model we developed allows the quantitative study of the sustainability policy. That is a policy which evaluates not only economic, but also environmental and social issues. For example: the model can be used to see what happens when measures are taken to increase energy efficiency.

Was it difficult to get the new data to supply the model from the Russian authorities? Yes, it was very, very difficult. We got help from the statistical offices, but the official data on Russia is still missing, due to the transition of the economy. For example, the old structure of the Russian economy was based on a government controlled industrial economy, while in Russia today the service sectors have become much more important. The new service structure is almost non-existent in the official data of 2000. In our database, we made changes to increase the share of the services sectors and bring it into line with the present state of the Russian economy.

Can this model help in planning energy use and be used to increase the sustainability of gas consumption? Yes, it can. It gives insight on what the impacts can be, indications of the direction, what steps to be followed when planning a gain in efficiency, for example. When we ran the model for the energy efficiency of the gas, we concluded that the price policy should be oriented towards both producers and consumers, in order to have a real impact on the efficiency of the gas sector and the greenhouse gas emissions. We also recommended the removal of the state subsidies for the gas supplied to the consumers and the decrease of the subsidies for the industrial producers. This is what the Russian government is doing now.

Has the price of the gas supplied by Gazprom increased by 10%, since 2011-2012 in line with the scenario proposed in the project? It is happening, but only for the consumers. Of course the price of the gas delivered to the consumers is significantly lower than that supplied to the industry. The gap is still very large. In addition, there is a kind of tradition in Russia to sell cheap energy to please the people. But the goal of the Russian government is to eventually bring the price of the gas supplied for the internal consumption at the price level of Europe. 60 % of gas in Russia is used domestically. And it is used quite inefficiently, because of old technologies, old distribution networks and the existence of centralised heating systems for consumers, who do not have to pay separately for the gas they use. The government has still a lot of control on Gazprom. I think they slowed down this change in energy policy, for fear it would create social unrest.

Have the consumers been harmed about a hike in the gas bill they pay? Yes, of course. Especially, during the cold winters. There will be a lot of pressure from the population to keep the price of the gas unchanged. It is a complex problem because Gazprom needs to carry out technological changes on its distribution network. It might be difficult, but it is necessary, because the Russian gas resources are not endless. There is a need for new investments. They will not be able to face the European market forever. It does not make sense to flare you own gas when you can sell it at a competitive price internally, as well. Economically and environmentally, the increase in price is necessary. But people are used to this cheap gas. It will create political and social problems to change the way people behave.

How do you evaluate the current situation in Russia regarding gas price policy? The recent numbers show that the price of the gas is 74 dollars- per thousand cubic meters for the Russian domestic market while Europe pays for it between 350 to 450 dollars. And the former Soviet states pay around 200 dollars. Of course Europe is richer than average domestic consumers in Russia, but this cannot go on forever.

Gazprom sets the export price pretty high in order to compensate the losses in the domestic market. It pays 132 dollars to produce the natural gas and it sells it domestically for 74 dollars, so Gazprom loses about half of their production costs by selling it internally. We advise: liberalisation of the market, while slowly taking away the price controls, gradually bringing the price of gas to the competitive level.

What other developments have happened in Russia since the end of this project? When we started this project, there was some interest of the Russian policy makers in issues regarding sustainability. But, as the economy is still passing through critical time, I noticed an enormous decrease in their interest in sustainability and emissions reduction. I think that the environment issue is back on the very low level of interest. The efficiency is now still on the agenda, but to promote economic growth. But maybe other producers will be inclined to invest in green technologies, because in Russia there is a huge need of new technologies to make the energy market efficient.